Johann Hari: And the next leader of the Labour Party should be...

At its core the disagreement between the brothers is an argument about whether Blairism is the best a Labour government can ever aim for

The Labour Party is infuriated that the climax of its leadership race has been overshadowed by Tony Blair's brief break from taking millions off the economy-crashing bank JPMorgan Chase, fawning over his "good friend" and murderous tyrant Colonel Gaddafi, and agitating for the bombing of Iran. But they're wrong. At its core, the disagreement between David and Ed Miliband is an argument about whether Blairism is the best a Labour government can ever aim for. The entry of the gurning ghost of Tony Blair is a clarifying third act.

Now that it's effectively a race between the Milibands, it's easy to ask: how different can two nasal policy wonks who emerged from the same womb really be? Yet this campaign has shown that they want to lead very different Britains.

David Miliband is being funded by exactly the same interests as Blair. To pluck just one, David Claydon, a senior figure at the investment bank UBS, has handed him £50,000, as part of a gaggle of bankers who made it possible for him to outspend every other candidate combined. He is backed by all the senior Blairites because, like Dr Who regenerating in a bright white light, he is the same politics with a less lined face. At the hustings, it has become clear that with David you will get all that was good about New Labour – much higher spending on public services than under the Tories, for example – and all that is bad. Whenever other candidates pointed out, in the spirit of trying to figure out how to do better next time, that at the end of the New Labour years, inequality was higher than under Thatcher, our emissions of warming gases were up, and there are now 20,000 unidentified corpses in Baghdad morgue alone, he snapped that it's wrong to "dump on the record".

It's not enough to say the debate should be solely "future oriented". The next Labour leader will face similar decisions. What he did in the past will shape what he does in the future. And David Miliband's record in government suggests he will always ask: what would Tony do?

As foreign secretary, he aggressively and unrepentantly defended the Bush administration's actions. He told the BBC's Hardtalk: "Divide and rule is rightly a maxim one applies." Perhaps most shockingly, he made extensive and expensive efforts to cover up the British security services' earlier complicity in the torture of British people abroad. He went to court to prevent us from being told how judges had laid out in detail how British resident Binyam Mohamed was rendered by the CIA to Morocco where he was subject to medieval torture, including the taking of a scalpel to his genitals, with MI5 feeding questions to the torturers. He says he "abhors" torture – but why then cover up MI5's role in it? Do Labour members want to see their leader forced to testify on all this before the new torture inquiry?

Ed Miliband is different. At every hustings he said – to tics and tuts from his brother – he's glad he was against the invasion of Iraq from the start and that when US foreign policy is in future heading in the wrong direction, "Britain should get off the train". His record in government suggests that this is true. While his brother was defending the Bush administration's atrocities, Ed was travelling the world as climate secretary, pleading governments to go much further and faster than the US allowed. At Copenhagen, I saw how he was one of the few politicians who grasped the scale of the climate crisis and sincerely tried to get a deal.

They also differ closer to home. Blair said this week that Labour lost because "it stopped being New Labour" – the argument that David Miliband's team are echoing. He named two policies that he says lost the party support. The first is the decision to increase taxes on the richest 1 per cent from 40 per cent to 50 per cent. Yet in reality, according to YouGov, some 62 per cent of Brits want to go further and introduce the higher rate at £100k. Only 25 per cent are against.

The second deadly policy, he says, is that Gordon Brown started "identifying banks as the malfeasants" after the crash. Yes: Tony Blair thinks people didn't vote Labour because the party was too critical of bankers. In truth, again, 76 per cent say Brown was too soft on the banks. Remember: these are Blair's own examples, not mine.

This is a perfect illustration of the argument that Ed Miliband has been making throughout the leadership debate. He has claimed that New Labour's initial instincts from 1994 have hardened into "ideological dogmas" that would leave the party "beached by history" in this decade. The more New Labour hardened into a right-wing caucus, the more it shed votes: by 2005, on Blair's watch, it was down to 35 per cent, and only "won" because of an undemocratic electoral system that may not be there next time.

So what's Ed Miliband's alternative? Peter Mandelson and others have offered up a silly straw man, claiming he believes Labour should "abandon the middle classes". In fact, he has a more subtle point. If you want to appeal to the middle class in Britain, you have to know what it is – and people like Mandelson seem to have forgotten in a blur of yachts and guacamole dips. The median wage in this country is £20,831. Only 10 per cent earn more than £40,000. So Ed Miliband wants policies that help the real middle – not the top 1 per cent that Blair, Cameron and co bizarrely class as "ordinary voters".

This, the real middle class in Britain, has been stressed for a long time as their share of national income has been steadily transferred to the rich. Over the past 30 years, the proportion of GDP paid in wages has fallen from 67 per cent to 54 per cent, while the proportion going to the rich as income from dividends has sky-rocketed. They work the longest hours in Europe, but their wages are, relatively, shrinking. There's a real redistributive will out there, waiting to be tapped.

Labour has lost 5 million voters since 1997. One million went to the Tories. Four million went to the Lib Dems and smaller parties, or to disgusted abstension. Three million were manual or unskilled workers. So it is basic electoral arithmetic that there are four times more votes to be won back there in winning back liberals and low-income workers than in becoming a Cameron clone. As Ed Miliband put it: "We can neither win an election with the working-class vote [alone], nor can we take it forgranted."

Of course, the Blairites say this can't win. Yet the polls show it was their totems – Iraq, the deregulation of high finance that made the crunch inevitable and the bank bailouts necessary, and on – that were the last government's most unpopular policies. By contrast Ed Miliband's agenda – to appeal to Britain's true middle and the lost low-income workers by arguing that they should have a greater share of the wealth they generate, while not killing a million people abroad – polls well. To suggest this is "Bennite", or a return to 1983, is bizarre: it's mild European social democracy, of the kind that is pulling Germany out of recession faster than the US.

So yes, we should thank the Ghost of Tony Past. He has reminded us that if you want more of the same, vote for the candidate he calls "my Wayne Rooney". But if you think this country could do better, brother, there's an alternative.

Follow Johann Hari on Twitter at twitter.com/johannhari101

j.hari@independent.co.uk